The Poor Get Richer

Blue-collar workers are making
salary gains. . . but don't cheer yet

GEOFFREY COLVIN / Fortune 15mar2006

I have good news and bad news. The good news is that income inequality in the
U.S. — after 30-plus years of steadily increasing — may be
decreasing. The bad news is why that trend is reversing. It looks like another
lesson in how profoundly a globalizing economy is upending what we thought we
knew.

Rising income inequality has settled comfortably into America's big economic
picture as a reliable — and much lamented — megatrend. Starting around
the late 1960s, U.S. incomes started to become more disparate. The trend was
remarkably steady. Recessions might slow it down or briefly reverse it, but
mostly it just marched on.

While such a large tendency has many causes, the chief explanation centered
on education and skills. The late 1960s were arguably high summer of the era in
which a man with 12 years of schooling could work in a unionized factory or
trade and earn a solid middle-class or even upper-middle-class income. Then
began the age of the info-based economy in which higher education really started
to pay. The "skill premium" began growing dramatically. The college
graduate's income started beating the high school graduate's income by a wider
margin every year — and income inequality began to swell.

That explanation makes sense, and the data support it. But now it appears
just possible — based on the latest research available — that the whole
chain of causation is falling apart. Wait before you cheer.

The evidence is in a new Fed study of family finances, the latest in a
triennial series. It shows modest but clear signs of incomes converging rather
than diverging. Between 2001 and 2004 (the most recent year for which data are
available), incomes of the poorest 20 percent of families increased while
incomes of the richest 20 percent fell. Basically, the poorest families' share
of total incomes grew, and the richest families' share shrank. Incomes became
just a little less unequal.

What could that trend reversal mean? The most obvious explanation seems
highly counterintuitive: The skill premium, the extra value of higher education,
must have declined after three decades of growing. The Fed researchers didn't
pursue that line of thought, but economists Lawrence Mishel and Jared Bernstein
at the Economic Policy Institute did, and they found supporting evidence in the
new Economic Report of the President, issued within days of the new Fed survey.
It cited Census Bureau data showing that the premium had indeed fallen sharply
between 2000 and 2004. The real annual earnings of college graduates actually
declined 5.2 percent, while those of high school graduates, strangely enough,
rose 1.6 percent. [see: Earnings Premium for Skilled Workers Down Sharply in Recent Years
- EPI 22feb2006]

That is so contrary to the conventional view of this major economic trend
that it demands explanation. One possibility is that it's just a blip. Could be,
but remember that 2004, when the readings started going haywire, was a year of
strong economic growth, low unemployment, and rising productivity, offering no
obvious reason to expect weird results.

The other main possibility is that something unexpected and fundamental is
changing in the way the U.S. economy rewards education. We don't yet have
complete data, but anyone with his eyes open can see obvious possibilities. Just
maybe the jobs most threatened by outsourcing are no longer those of factory
workers with a high school education, as they have been for decades, but those
of college-educated desk workers.

Perhaps so many lower-skilled jobs have now left the U.S. — or have been
created elsewhere to begin with — that today's high school grads are left
doing jobs that cannot be easily outsourced — driving trucks, stocking
shelves, building houses, and the like. So their pay is holding up.

College graduates, by contrast, look more outsourceable by the day. New
studies from the Kauffman Foundation and Duke University show companies
massively shifting high-skilled work — research, development, engineering,
even corporate finance — from the U.S. to low-cost countries like India and
China. That trend sits like an anvil on the pay of many U.S. college grads.

We need more evidence before concluding that we're at a major turning point
in the value of education to American workers. But it certainly feels like one,
based on what we can observe. Higher education still confers an enormous
economic advantage. Just not as enormous as it used to be.

As for income inequality, pretty much everyone has always hated it, and its
growth was a certain cue for handwringing and brow furrowing. Well, it's not
growing anymore. Because our best-educated workers are earning less, and the
incentives for higher education may thus be declining, the result could be a
more uniform — and lower — standard of living. Be careful what you wish for.